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Price Skimming: Advantages & Disadvantages and Real-life Cases

Ecommerce price skimming is a type of price discrimination and can be a useful pricing strategy depending on your business industry.

Some e-commerce store owners enter the market with below-average prices to ensure they attract as many people as they can. But what if there was a way to keep your prices high and still make a profit?

What if you were able to capitalize on your new products by having increased prices for early adopters?

That’s all possible with e-commerce price skimming.

In this blog post, we’re going to examine exactly what a price skimming strategy is, how to implement it and look at some of the advantages and disadvantages of using it.

What is e-commerce price skimming?

In its simplest terms, e-commerce price skimming is the art of setting high prices for products initially when entering a market and gradually shaving off prices as the product transitions through its life cycle.

Especially when it’s a technological product, it takes a while before any competitor to adopt the technology and businesses want to take advantage of this situation. In other words, the pioneer company sets a high price and lower it as the competitors catch up with their technology.  

If you fail to apply this pricing strategy, you run the risk of leaving a lot of money on the table and plummeting market shares. To avoid such uncanny consequences, we’ll show you how to benefit from price skimming and when to stop properly.

Who to apply price skimming?

The first thing about price skimming is that it works well with innovative technology products. A uniquely designed drink coaster or phone cover isn’t what we’re looking for here because they can easily be copied. Whereas if you combine a unique design with a grain of innovation, it will take some time before others figure out how you’ve built it. That’s why industries like technology and software are popular because there is an incredible amount of profit that can be collected.

Are you familiar with the phrase early-adopters? They are the consumers out there who want to be the first ones to get hold of a specific product. They are driven by emotional triggers that feed the sense of exclusivity and more importantly superiority in comparison to their environment. This persona is your target audience and they are tough but if you can get their attention, you’re in for a big treat!

Some tips for this type of audience

Using phrases like “exclusive offer” or “limited availability”, “be the first to get your hands on” is what makes them tick and take action. However, keep in mind that they won’t get fooled easily. Writing great copy is helpful but won’t do any good to make a sale if you don’t have a sexy product (design + innovation), period. 

Depending on your product you might not need to have a huge budget. Strategic use of micro-influencers, great product images, and social media might help you create a great impact on brand awareness. Building an email list before launch and giving a sneak peek of your product will make them want your product even more.

No matter which marketing strategy you do be patient about lowering your prices and save it for later, especially if you see demand. Only consider lowering your prices if demand for your product decreases, or competitors move in to sell the same or similar product at a lower price.

Advantages

There are three core advantages of using price skimming as an initial price strategy. 

First, it helps you cover the costs of innovation. Furthermore, it provides extra cash for product development, which is necessary for a sustainable marketing plan. 

Second, early adopters will promote your product without you making an effort. If you manage to align your marketing efforts to your pricing strategy, your product can appear as if it’s a superior one. When your customers know why your product/technology is best, they understand why your price is higher.

Third, it gives you the ability to segment the market, whereby you control the price for each segment of customers. This shouldn’t be mixed up with anti-competitive behavior though and if you see that your business is swimming in these waters consult legal advice immediately.

Disadvantages

Early adopters will be disturbed by the gradual decrease in price because of price discrimination and the illusion of lower prices to lower quality.

Although it’s a high profit yielding strategy, it requires so much time and money invested in product development.

Even in the case of successful product development, every producer must acknowledge the fact that the technology will be adopted eventually.

It’s important to follow competitors in the market and anticipate the time they’ll manage to duplicate the technology. That’s when a business must compete on price. 

The story of Apple vs. price skimming

Think of Apple’s pricing strategy for the iPhone. It’s the most famous example of the price skimming strategy.

What was iPhone’s innovative technology that allowed its release with a skimming price? Was it the first touch screen phone? Not really. Was it the first smartphone? No. The first smartphone, also the first touchscreen technology phone, was IBM’s Simon Personal Communicator launched in 1992.

Then what was iPhone’s distinctive feature? It was the operating system installed on a cellphone that turns it into a palm-sized computer that can run applications. Its innovative nature attracted many early adopters that purchased 4 and 8 GB models and paid $499 and $599, respectively. Within an hour of its release, many stores reported stockout. 

After two months of iPhone’s release, Apple released iPod Touch, a device operated on a similar system that could browse the internet and run apps. But the iPod couldn’t connect to a cellular network. It could only connect to a Wifi. After iPod’s release, the price of the 8GB iPhone dropped from $599 to $399. 

The price drop irritated early adopters. Apple offered store credit to them, avoided a crisis and urged those customers to buy the newest version with a discounted price. 

Reinvested in product development

For the upcoming years, the company managed to maintain product development at a good pace, attracting more and more customers. At the same time, others were struggling to catch up.

Samsung’s BlackJack II was competing with the first generation iPhone, but Apple’s operating system and user interface performed much better than BlackJack II. It was available for $149, but the much affordable price couldn’t substitute iPhone’s functionality and design. 

Others started catching up

No technology can remain unrivaled. Everybody was aware of the incredibly high-profiting product, and eventually, some managed to produce similar technology or even surpassed it. The key to a continuous price skimming strategy is adding new features while improving design to sustain a competitive advantage.

Consumers started getting equipped with tools that helped them compare product features and prices seamlessly. Many smartphones started to be much more affordable than an iPhone because the companies offered mid-range and low-priced smartphones along with premium segmented products.

The competition was inevitable and the story of iPhones’ increasing prices had to make a stop.

Apple joined the price war

Apple’s market share has decreased from 23% in the first quarter of 2012 to 10.1% in the second quarter of 2019. Although these numbers are fluctuating, we can say that people are preferring cheaper options with similar features due to many economic factors.

For the first time in history, the company released the iPhone 11, for $50 cheaper than the last year’s comparable model. However, it’s still early to tell whether it’ll be enough to attract consumers. 

An example you have witnessed

Think of the DVD player prices in the late 1990s. When first introduced in 1997, Panasonic sold it for $750 and Toshiba sold it for $599. These numbers gradually decreased to less than $50 today, unfortunately, the demand is very low for this technology. 

Takeaways

Price skimming means taking the cream off of each market segment. Once early adopters buy at a high price, it comes to more price-sensitive consumers targeted at a lower, more affordable price. 

The strategy fits perfectly for technologically innovative products since they give a business significant leverage until the technology is adopted/developed by other players. 

Price skimming has three core advantages:

  • It helps vendors recover any costs of development.
  • Early adopters promote the product for free.
  • It segments the market for different price points.

Like every other business strategy, it also has disadvantages:

  • The price decline might disturb the early adopters targeted at a high price.
  • It requires continuous product development.
  • Even if it takes long others will produce the same/similar technology products. If the pioneer company misses this point, high prices will impair its competitive strength. 

The most famous example of a successful price skimming strategy was used by Apple. But the company kept setting high prices even after it has lost its competitive advantage. Price sensitivity is increasing throughout the years and Apple has just entered the pricing war with its new model.

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